Why there are no safe-haven assets for investors

Where are the safe-haven assets in a crisis? The answer has rarely been murkier. Gold is the usual place to wait out market shocks, but it has struggled for direction since US-Israeli strikes began on Iran on 28 February.

Gold's problem is that it had already risen 20% this year, leaving it “overextended” heading into the conflict, says James Mackintosh in The Wall Street Journal. That made it “an obvious asset to sell” for traders looking to raise quick cash.

“It's hard to overstate just how unusual” trading has been during this war. When stocks fall, gold and bonds usually rise. This time all three assets have fallen, a historical rarity. Where else to hide? “Defensive” stocks (think utilities and consumer staples) usually outperform at times of market stress, says Niket Nishant for Reuters.

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Not this time. European consumer staples fell 4.5% last week, worse than the 3% drop on the wider Stoxx 600 index. Traditional safe-haven currencies haven't fared any better. The Swiss franc and the Japanese yen both sold off as bombs dropped on Tehran.

So far, the only traditional safe-haven asset to have done its job is the US dollar, up nearly 2% against a basket of other currencies over the past month. That reflects the fact that as an energy-exporter the US is less exposed to oil shocks, but even this comes with an asterisk. Investors are loading up on “short-term dollar cash” but want nothing to do with long-term dollar assets such as US Treasury bonds, which also slid.

Gilts – traditional safe-haven assets – have been clobbered

UK gilts “suffered their worst week” since the 2022 pension fund debacle, says the Financial Times. Two-year German bonds had their worst week since 2023. That reflects two risks. Firstly, that higher energy costs will raise inflation and delay interest-rate cuts. Pricing shows that traders now put only a 50-50 chance on one Bank of England quarter-point rate cut before the end of the year, compared with the two cuts expected a few weeks ago.

Secondly, concern that a serious energy shock could pressure the Treasury to spend “billions of pounds in new support measures”. While all bonds have sold off, gilts have recently been underperforming French, German and US government paper, partly because the UK is especially dependent on imported energy. When investors took fright in March 2020, they thronged into US Treasuries (and other sovereign bonds) to wait out Covid, says Matt Zeigler in Panoptica Money.

But since then, the hierarchy of “safety assets” has been “fundamentally reordered”. The decisive event was the removal of key Russian banks from the SWIFT banking system in 2022. Holders of “surplus capital” in Asia and the Gulf realised that what “happened to Russia could happen to them”. They are now choosing to forego dollar-denominated assets such as Treasuries when choosing where to stash their wealth.

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